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Ambiguity of tone in annual reports and bank risk taking

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  • Kiridaran Kanagaretnam
  • Wen Li
  • Guifeng Shi
  • Zejiang Zhou

Abstract

In this paper, we examine whether abnormal ambiguity of tone in banks' 10‐K filings is associated with banks' risk‐taking behaviour. We estimate abnormal ambiguous tone using residual of a tone model that disentangles the obfuscation component from the information component in the ambiguous tone. We find that banks that intentionally use more ambiguous tone in 10‐K filings exhibit higher risk taking subsequently, consistent with the argument that an intentional ambiguous tone adds to the opacity of financial statements, which potentially masks managerial risk‐taking activities and curbs market discipline from external stakeholders. Our results remain robust to alternative model specifications and sensitivity tests which address potential endogeneity concerns. Furthermore, banks with higher abnormal ambiguous tone are associated with more aggressive investment decisions. Together, our findings suggest that abnormal ambiguous tone in annual reports is informative of banks' risk‐taking activities.

Suggested Citation

  • Kiridaran Kanagaretnam & Wen Li & Guifeng Shi & Zejiang Zhou, 2025. "Ambiguity of tone in annual reports and bank risk taking," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 65(1), pages 935-970, March.
    • Handle: RePEc:bla:acctfi:v:65:y:2025:i:1:p:935-970
    DOI: 10.1111/acfi.13353
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